The International Monetary Fund (IMF) has assessed that Indonesia faces moderate systemic risks amidst an ongoing upward trajectory of interest rates. While this moderate increase in interest rates can potentially expose banks and corporations to vulnerabilities, there are specific sectors that are particularly impacted by non-performing loans due to the pandemic, including manufacturing, wholesale and retail trade, and accommodation.
According to the IMF’s recent Article IV Consultation, the assessment indicates that the moderate systemic risks are relatively unchanged compared to the previous year. Despite witnessing double-digit credit growth, the credit gap relative to GDP is anticipated to persist in the negative territory, specifically at -2% during the first quarter of 2023.
Although private debt or corporate debt remains relatively low, the IMF’s analysis of listed companies suggests that these entities could become sensitive to cumulative policy rate increases since 2022. This vulnerability is particularly noticeable among companies classified as “debt-at-risk,” characterized by an interest coverage ratio (ICR) below one, which has increased from 21% to 28%.
Furthermore, the IMF highlights the increasing bank lending to households, although it is still below pre-pandemic levels. The real estate market is experiencing negative growth in housing prices, while household debt as a proportion of GDP has remained relatively stable at approximately 17% over the past few years.
When examining the risks associated with future real GDP growth, the analysis of “growth-at-risk” indicates a stable and moderate downside risk. This analysis establishes a link between macrofinancial conditions and the probability distribution of future economic growth.
Considering the overall financial stability risks in check, it is deemed appropriate to maintain an unchanged macroprudential policy stance throughout the current year. However, the goal is to gradually transition towards a more neutral stance by 2024 as credit gaps narrow down to zero.
It is important to note that the increase in interest rates may intensify vulnerabilities for both banks and corporations, especially within sectors severely affected by the pandemic. Notably, manufacturing, wholesale and retail trade, and accommodation have experienced a concentration of non-performing loans.
To mitigate these risks, banks have taken steps to increase loan loss provisions, accounting for 214% of non-performing loans as of January. This measure ensures the maintenance of asset quality and involves a rebalancing of government bond portfolios. The transition from available-for-sale (AFS) to hold-to-maturity (HTM) helps to reduce mark-to-market losses.
While the IMF recognizes Indonesia’s banking system as adequately resilient, it advises maintaining caution to monitor the potential risks associated with rising interest rates. This ongoing vigilance is essential to safeguard financial stability and ensure the sustainable growth of the Indonesian economy.